Preface

Howard Marks, a 73-year-old Wharton graduate, co-founded American Oak Capital Management (Oaktree Capital) in 1995 and now has $100 billion in assets under management (as of March 2017).

Howard Marks has been writing "investment memos" for investors since the 1990s. In his investment memo in January 2000, he predicted the bursting of the technology stock bubble and rose to fame, and the "investment memo" became a must-read document on Wall Street.

"the first email I opened and read was Howard Max's memo. I can always learn from it. His books are even more so, "says Warren Buffett.

Buffett rarely recommends investment books, but in 2011 he highly recommended Howard Max's book "the most important thing to invest" and said he had read it twice.

This article is a wonderful speech by Howard Max in Shanghai in 2015, sharing how the investment philosophy behind "the most important thing to invest" comes from and where these influences come from.

I'm glad you're here to hear about my book, my investment philosophy, and how we manage money.

I would like to take this opportunity to reiterate what I firmly believe they are necessary in my investments. What I would also like to talk to you today is how the investment philosophy behind this book comes from and where these influences come from.

You must understand that the world is made up of uncertainty

We need to realize that the world is a world full of uncertainty, so that we can understand how to deal with it. If you think the way to deal with the future is to accurately predict what will happen in the future, think you are right and use it as a basis for action, you must be asking for trouble. If something unexpected happens, you may end badly.

The humorous Mark Twain said: "What gets you into trouble is not what you don't know, but what you think you know but are actually wrong."I think too much faith in the future may be the root cause of the danger.

Too much uncertainty is the source of danger in our world

It's dangerous to base your investment on predictions for the future. My predictions don't have to be any better than others. After all, no one can make a correct prediction about the future. So our portfolio must perform well in all kinds of macro situations in order to control the risk.Only when we know we are ignorant can we accept the many possibilities of the future.

3. I understand that the development of the world is often controlled by random events.

We cannot say what will happen in the future. The future is made up of random events that may occur. Even if you know the distribution of random events and the relative probability of each event, you don't know when these events will happen. I think it's important.

4. Leave a safe space to deal with uncertainty

It can be said that I have been successful in my career because I study what may happen in the future, but I don't think it will happen, leaving room for uncertainty and variables. Prepare for life in an uncertain world.

5. Risk is exactly what most people think will not happen.

What is risk? A very good interpretation is that "risk means that something unexpected happens" (Risk Means More Things Can Happen Than Will Happen) (as Eloy Dimson, a professor at the London School of Economics points out).

If a risk is in the current market and most investors think it will happen, then it is not a risk.If most investors believe that something will not happen in the future, then it is the risk.

But the truth is that we never know whether something is going to happen, and from this point of view, we must try to understand the future and understand its possibilities, but never assume that we have fully figured it out.

6. There is no particularly bad record, good, outdated, good, sometimes bad.

Simon Ramo wrote a book about tennis, which influenced me a lot. Simon said there are two kinds of tennis matches, one is the winner's game, the other is the loser's game.

The winners were played by professionals such as Federer, Djokovic, Nadal and Sampras. The winner of the tennis championship is skillful and skillful, so there is no need to worry about the rebound of tennis, the speed of the wind, the glare of the sun, the lack of skill, and so on. They can play as much as they want, and they can do whatever they want.

The winner's game belongs to the winner. When the winner hits the ball, the opponent can't catch it. To win the championship, you have to play the kind of very tricky ball that the winner can play.

As for us, we can't play the ball like the winner. We won the game mainly by avoiding playing the ball like the loser.

Amateurs like me can't play tricky balls, and sometimes even simple balls can't be caught. What we are after is to hit the ball back, and we are to hit the ball back.

We know that if we can fight back ten times, the opponent may only be able to do it nine times. Sooner or later, the opponent's ball will be out of bounds or can not cross the net. We don't win by hitting a good ball, we win by not playing a bad ball.

When I read this article and extended this concept to investment, I had a clairvoyant feeling at that time. We live in an uncertain world, it is difficult to always make successful investments, those who pursue great success often fail.

I've come to a conclusion that, for me,Perhaps the best way for us to succeed in long-term investment is to make no mistakes, no wrong investments, no bad years.As long as a good investment is accumulated, as long as the performance is steady year after year, 20, 30, 40, 50 years, this will be a successful investment career in the long run.

The key is that it is impossible to be right every time, it is difficult to know what will happen in the future, it is difficult to hit a good shot or make a good investment, and succeed overnight, but as long as we avoid failure, we are on the right path to success through investment. In the investment business, if you haven't had a bad performance in 20, 30, 40 years, your record is first-rate.

7. Investment should not be based on macroeconomic forecasts

Macro forecasting refers to predicting how the economy, market and interest will change in the future. First of all, it is very difficult to study and understand these things, and secondly, it is very difficult to understand them better than others.

What advantage do I have over others when people like me predict what will happen to the world economy, the US economy or China's economy or interest rates or China's A-shares next year? It is difficult to understand these things better than others have studied. And we achieve better investment performance by understanding better than others.

The investment of Oak Capital is not based on macro forecasts for the future.

8. How should you invest

First, you have to consider what the investment results will be in the future.When building a portfolio, the portfolio must be at least OK, that is, it is still feasible in any possible scenario.

Second, strive to control risks.The risk is not to get out of control in any scenario you can consider, so that you don't experience poor investment performance.

Third, we don't assume that we can understand macroeconomics, but we really should know more about microcosmic things.What is microcosmic? That is, companies, industries and securities. On the to-do list of these specific, smaller images, if you study these very hard and have the right skills, you can understand these companies more deeply than others.

9. The Holy Grail of investment: bargains

When I first joined Citibank in 1968, the company invested in the so-called "beautiful 50", the 50 best and fastest-growing companies in the United States, including Hewlett-Packard, Texas Instruments Inc, Coca-Cola Company, Merck and Eli Lilly and Co. The problem is that these companies are too expensive. If you buy them in 1968 and hold them for five years, by 1973, you will lose 80% to 90%, even though you buy the best companies in the United States.

In addition, some of these companies had high hopes, but finally fell down, such as Kodak and Polaroid. Nowadays, few people take pictures with film, and few people use Polaroid cameras, because we can take countless photos for free with our mobile phones. These companies basically disappeared, but in 1968, people invested in these companies at very high prices, believing that they would always be so perfect that they would disappear. The point is, you can lose a lot of money when you buy a good company.

We can learn a lesson from this: a good company and a good investment are not the same thing. Buying a good company can lose a lot of money, while buying a bad company can make a lot of money. That tells us.It is certainly not the texture of the company that determines the return on investment.

So what determines the return on investment? It's the buying price.If the company is expensive, you may lose money. If low-quality companies are cheap, you may make money, or even make money safely. This is very important to the formation of my investment concept.

I realized that what matters is not what you buy, but how much you spend on it. The key is not to buy good things, but to buy good things. This is very important.

10. Wise men create, fools imitate

In investment, every trend will go to extremes in the end.

When A shares are 2000 points, people who invest in A shares are doing the right thing. But later, when the stock rose, others were attracted, and others bought it, too, buying more and more, getting more and more excited, and using leverage to buy. Then the person who bought it at 5000 will suffer.

This tells us that if you act early in the trend, at the right time and at the right price, you can safely get good results. If you act at the end of the trend, regardless of timing and price, you may be in big trouble.

Never forget a man who is six feet tallMay have drowned in a stream with an average depth of five feet.

When we invest, we can't just live on average, we have to survive every day.

Therefore, the portfolio we build must be able to withstand the worst test. Our investment management must be very professional, have a strong sense of risk and a strong sense of conservatism, so that we can get through the difficult times.

It is easy to live a good life, but it is not difficult to survive when it is good. In fact, everyone is doing well at this time. The hard part is who can get through the hard times, the portfolios are too aggressive, those who are overleveraged can't survive the hard times, and the people who are six feet tall drown.

12. It is difficult to tell whether it is much earlier than others, or if you have done something wrong.

As mentioned earlier, investment is facing the future. in the field of investment, it is difficult to do the right thing, and it is impossible to do the right thing at the right time all the time. In other words, even if we do the right thing, our timing may not be exactly right.

We are probably too early. If it is too late, we may be in trouble. So you should hope you're too early. But if you're too early, for a while, it looks like you're doing something wrong.

When A shares reached 4000 points, some people said no, it was too dangerous, and they left the market. From 4000 o'clock to 5000 o'clock, it seems that they are wrong, and they also think that they are wrong. They may regret leaving the game at 4000 o'clock and can only watch others make money all the way to 5000 points.

They feel that what they have done is wrong, but in fact they are right, but it is too early. Our timing can never be accurate. You must have courage and faith, and if there is a good reason for what you do, the facts will eventually prove that your actions are rational.

I must have courage myself. I bought something whose price was falling. I bought it because it was cheap, because it fell, and I liked it, so I bought it. It will continue to fall. I have to be confident and believe that I am right. We can't sell it just because it continues to fall. So you have to keep in mind that it is hard to tell whether you are much earlier than others or whether you did something wrong before the facts finally prove that you are right.

13. What is the task of the asset manager

First, control the risk.

What is the task of the asset manager? Do you make a lot of money? Beat the market? Did you beat Wall Street? We disagree with all of this. The first job of an asset management manager is to control risks. We in Oak put risk control at the highest level.

We position ourselves as an alternative asset manager. We don't invest in mainstream stocks, mainstream bonds, we explore less focused corporate bonds, convertible securities, distressed bonds, controllable investments (energy, infrastructure), real estate, publicly listed stocks (undervalued), emerging markets, etc., we have our own investment strategies for each category.

Second, stability.

Our investment performance will not rank first this year and then last next year. We are usually in the middle, and because of our excellent risk control, we will stand out in difficult times. We have achieved this goal in the past 30 years.

We get average earnings, average earnings are OK in a bull market, everyone makes money in a bull market, which is enough, but our customers want us to be above average in a bear market.

To sum up very simply: in a bull market, we get average returns, and in a bear market, we get excess returns.

What will happen if we can achieve this goal year after year, decades? Our performance volatility will be below average. The overall higher-than-average return is because our outstanding performance in the bear market enabled us to achieve this goal, which is really necessary, so that our customers will be happy.

I think this is the secret of the growth of our company. After 20 years, we reached a scale of hundreds of billions of dollars, from 3.5 billion in 2006 to 100 billion today, and we really started our asset management business in 2007, and 2008 was during the financial crisis. We received 10 billion dollars at least in 2007, because our performance will be better than the average in a bear market, and we can show people the results of this investment. People think that Oak Capital is trustworthy and capable of delivering a sustained and stable investment performance. We grew up!

Third, we are looking for the part of the market that is not very efficient.

We think it's very difficult for investors to gain an advantage to make money in that part of the market that people can understand, but for that part of the market that people usually don't understand, you can do relatively better, like bonds, convertible bonds, personal mortgages, infrastructure, real estate, emerging markets. It is relatively easy for these projects to gain an investment advantage, but it is not that easy, but it is relatively easy compared to products in a fully effective market.

Fourth, we believe that macroeconomic forecasts are not the key to successful investment.

As I said earlier, I don't believe that macro predictions will work. In my opinion, macro forecasting is not a necessary condition for successful investment. All the successful investors I know, including Buffett, are not successful because macro forecasts are better than others. Their success depends on their knowledge of companies, industries and securities.

Finally, we do not speculate on the rise and fall of the market.

When managing funds, we don't put money in just because we think the market is going up and take it out just because we think the market is going to fall. It is too easy to make a mistake in this way to guess the rise and fall. We just enter the market and then basically stay in the market. But we will adjust the degree of aggressiveness or conservatism based on the prices of market assets and the psychology of investors around us.

Long-term investment success is not achieved through great investments, in the case of baseball, not from occasional home runsThe long-term success of investors comes from building a safe portfolio.There are few failures and few bad years. If you can do this seemingly simple but actually difficult thing well, you can achieve a very successful investment performance in decades. This is our goal, and I think we have achieved it. That's what I want to share with you.

14. HowardAbout asset allocationSuggestion

1. Just as we don't put eggs in the same basket, we don't know the future, so everyone should diversify.

2. There is no "Magic Number" (specific investment allocation ratio). For investors, investment needs to be done step by step, feel good, do more, step by step, if you do not understand, invest too much will only be worse, you can make mistakes, but can not lose all your money.

3. At the same time, it is not encouraged to use a very small proportion (less than 5%) in your portfolio to invest what you like, because too small investment no matter how the performance plays a small role in your portfolio, it doesn't make sense.

4. Don't invest in things you don't understand. If you don't understand at all, don't do it.